How to choose the right PE firm for your business. Part 2.

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In the second article in this series, former Entrepreneurs Panel member Bill Collis shares decades of private equity and CEO experience to reveal how to choose the right private equity firm for your business.

I know from experience that closing a PE deal is a stressful decision. You will be surrounded by advisors and lawyers all trying to get the deal done with non-stop demands on your time.

This is not the time to start thinking about wider considerations like PE firm size and how much support they’ll give your business. These should have been thought through well before you’re about to make your decision.

I’ve already discussed three fundamental aspects to your PE firm selection here. Or you can read on to find out about the people and relationship considerations to help you make the best PE firm choice for your business.

Consideration #1: get to know the person running the fund

You spend time and effort hiring the right employees for your enterprise and you should apply the same care when inviting a PE partner to back your business.

To ensure you bring the right firm into your business, look out for organisations that are open to discussion. Seek leaders who are influenced by other voices from within their own firm and supported by an investment committee that provides different points of view.

If, during the courting period, you find you don’t get on particularly well with the person who’ll be supporting your business, it’s time to walk away. Why? If you don’t get on now when they’re trying to impress just imagine how nasty things could get during the tough times.

My top tip: choose your PE firm on the basis of the person you want on the other side of the table from you during difficult periods.

Consideration #2: know who you’re dealing with

Find out if the individual you’re talking to during your discussions is the person who’ll be sitting on your board.

There’s an increasing trend for PE firms to hire deal makers who court companies during the sale process, then once everything’s signed and sealed, they’ll head off to the next deal and a new face will join your board.

Of course, people leave firms or move careers, so there’s a chance change will happen. But by asking if the individual you’re meeting will be with your business for the next four years, you’ll be clear about who you’ll be working with.

My top tip: decide how you’ll agree who the next board member will be should your PE partner move on. Ensure you’re part of the decision making process as you would be with any other new board-level hire.

Consideration #3: referencing is essential

If you’re about to invite a PE firm to invest in your company, you need to know that they’re as good as they say they are.

Of course, each firm will give you names from other companies they’ve invested in and you’ll go and talk to these people. But, just as you would if you were hiring a new exec for your team, you should carry out your own blind referencing. This means doing your homework and talking to some non-sanitised people who’ve worked with the PE firm.

The timing on this is important. I’d suggest you complete this level of detailed digging while you still have the time and the headspace to do it – well before you close any deal.

My top tip: seek references from similar businesses to your own where possible.

Consideration #4: attitude to management

Every PE firm in the world will say they back management so you’re going to hear that message a lot. Your job is to peel back the layers and try to understand exactly what that means for each firm.

It’s not easy to work out how a PE firm will behave, especially when things are not going to plan, but it is critically important to try. You can do this by digging into past investments to view the firm’s track record and by asking the following questions:

  • How often has the PE firm changed management teams in part or as a whole?
  • Do their actions match up to what they’re saying about backing management?

My top tip: include this research as part of your referencing process to get to the truth.

Consideration #5: level of support and consultancy

At the dawn of the PE industry, the role of an investor was to carefully pick an undervalued fast-growing company, invest, monitor and then sell it for a large multiple. I’m being facetious of course, but now life is more complicated.

Today, many PE firms have built up large internal teams of very talented business people experienced in running really good companies. Often called a portfolio or value creation team, these individuals go into businesses backed by the PE firm. In their role as consultants or temporary employees they help the company develop its strategy to make it even more successful.

This all sounds excellent. After all, why wouldn’t you want lots of advice and sector expertise?

But, imagine your senior team post-PE deal. They’re slightly frazzled following one of the busiest and most stressful times of their professional lives. A week later, a team of five experts arrive in reception ready to help. As CEO, you were just about to take a well-deserved holiday but now you’re introducing five senior people to your company and making sure they fit in.

The other challenge is that bringing in external expertise doesn’t always work.  Sometimes an individual’s knowledge and point of view doesn’t quite gel with the prevailing view among your existing team. Plus, employees can also feel unsure about whose direction to follow. None of which is particularly helpful.

Yes, consultancy has the potential to bring really big upsides to your business. However, support can also be disruptive if it’s not handled in the right way or if it comes at the wrong time.

As CEO, you need to decide what you want. A company that’s going to provide loads of support with all the upsides that can bring? An easy life where you take the money and ignore the help? Or do you want the option to find different experts who might be a better fit for your business?

Some of this will depend on where your business is in terms of development. If you’re quite new, you might want to fill gaps in knowledge or seek strategic decision-making support. If your business is well developed, you could have all the expertise and vision you need, making extra ‘help’ more of an interference.

My top tip: Don’t leap at offers of support immediately – you can still take them up six months down the line. Accept assistance as and when you, or the firm, needs it. Listen to your gut on this – as CEO it’s probably right.

People and relationships can make or break your business, so choosing the right PE firm on the basis of the people you meet is key. Backed up with referencing that asks the right questions about potential partners, you’ll refine your PE partner options. Giving you greater assurance when it comes to making your final choice. 

ABOUT THE AUTHOR

Bill Collis

Bill Collis

A software engineer turned growth CEO, Bill brings international sales experience and a deep understanding of scaling technology companies. Bill was a member of our Entrepreneurs Panel from 2016 to 2020.